The Dow Jones industrial average is dumping four old industrial giants in favor of four young stock-market upstarts as part of a significant overhaul designed to match up the most visible symbol of the stock market with the modern economy.
Starting Monday, the barometer of 30 blue-chip stocks will begin tracking software giant Microsoft Corp. and computer-chip maker Intel Corp.--the first Nasdaq stocks ever to join the 103-year-old average, before now exclusively the province of New York Stock Exchange issues. (Nasdaq, an electronically linked institution without the frantic floor traders familiar to television news viewers, stands for the National Association of Securities Dealers Automated Quotation system.)
In a nod to the nation's love for big-box shopping and constant electronic communication, the benchmark will also add Home Depot Corp. and SBC Communications Inc., the nation's largest local telephone company.
The shake-up marks a new chapter for the average, which was conceived by Dow Jones & Co., publisher of the Wall Street Journal, as a gauge for the broader market. The ups and downs of the Dow are so closely watched by investors--and relentlessly chronicled on television and in newspapers--that even small movements can have a dramatic impact on investor psychology.
But as the Dow achieved greater symbolic value for investors, it was frequently dismissed as outdated by many Wall Street veterans because it was heavily weighted in Rust Belt companies, not the high-tech dynamos that have captivated the market in recent years. The four new Dow components have an average market value of $236 billion, compared with $21 billion for those being tossed aside.
"We want the 30 slots to do the best job they can at telling the story of the market," said John Prestbo, the Wall Street Journal editor who runs the Dow average. "By extension, it should aptly reflect the U.S. economy."
That philosophy riled the pre-Depression companies getting the heave-ho--Union Carbide Corp., Chevron Corp., Goodyear Tire & Rubber Co. and Sears, Roebuck & Co. "Any suggestion that today's changes will make the Dow Jones Industrial Average even more representative of the evolving U.S. economy is misguided," sniffed a statement from Sears, which joined the Dow in 1924.
Until now, only three of the 30 stocks in the Dow average were technology companies--International Business Machines Corp., Hewlett-Packard Co. and Eastman Kodak Co. By comparison, about a quarter of the 500 companies tracked by Standard & Poor's are high-tech.
"It has been entrenched in old, stodgy stocks," said Charles Carlson, who co-manages the $100 million Strong Dow 30, one of just a handful of funds that track the Dow. "This is a watershed development."
Carlson quickly sold off the four companies that were being removed and bought the companies that will be added. And apparently he was not alone: The stock of all four companies marked for removal slipped.
"Most companies that are dropped from the list do not perform well later," Carlson said.
Westinghouse was supplanted in 1997 by Travelers Group (now Citigroup). That year, Hewlett-Packard Co., Johnson & Johnson and Wal-Mart Stores Inc. also replaced Texaco Inc., Bethlehem Steel Crop. and Woolworth Corp.
The Dow was created by Charles Dow in 1896, with 12 stocks, to measure a cross-section of the economy. The list has been handed down over the years to various editors, who have tinkered with it repeatedly, leaving just five companies that were there in 1930--the year Goodyear joined. General Electric is the only original company left.
The latest shift has been mulled for months, as Prestbo and his staff debated how to whip it into shape for the new millennium. Their decision was swayed recently by several developments, including the merger of Exxon Corp. and Mobil Corp. into an oil giant that dwarfed Chevron, and Union Carbide's acquisition by Dow Chemical Co., which took Union Carbide out of the ranks of independent firms.
"This is really a catch-up with the shifts in economic importance that have been going on for a long time," said Dick Hoey, chief economist at Dreyfus Corp. "Intel is to the economy what U.S. Steel was 50 years ago. It's the producer of the product that's ubiquitous in a lot of other products."
Microsoft is the biggest company in terms of market capitalization. Still, the latest change does not necessarily portend a big rise in the Dow, because it is one of the few market indicators that are price-weighted. That means high-priced stocks, such as IBM, have more of an effect than lower-priced peers.
When it was created, its calculations were done by pencil and paper. Charles Dow added the 12 stocks and divided by 12.
Now, it is calculated by dividing the total of the prices by a divisor, currently about 0.2. It is recalculated for stock splits, spinoffs and changes in components.
So, if the new components trade as they did this Friday, there should be no change in the Dow. But, if Microsoft and Intel continue their recent surge, they could pull the Dow up with them in coming weeks.
"All we need is bad news from Microsoft and Intel next week and we're going to look pretty stupid," Prestbo joked.
Most other indexes, such as the S&P 500, are weighted by market capitalization and influenced most strongly by companies whose total value is the greatest. This is one major reason Wall Street professionals generally watch broader indexes more closely.
Funds that track the S&P 500 have about $700 billion in assets, compared with the $165 million in those that are indexed to the Dow.
Prestbo, however, predicted that more money managers could begin following the Dow, generating income for Dow Jones, which, like S&P, gets licensing fees. The company could push the fact that the Dow has far outperformed the S&P this year.
Over five years, however, it has mirrored the broader index, gaining about 24 percent. In any event, the Dow is not a big indexing tool, it is still far more visible in a media sense.
"This is a very, very important move," said Ralph Acampora, chief technical analyst at Prudential Securities. "It's like they're taking an old Ford, putting a brand-new engine in and racing stripes."
Percent change in stock price
New Dow stocks
Yesterday Year to date
Home Depot -1.7% 15.5%
Intel 0.3 20.5
Microsoft -0.1 33.2
SBC Communications 3.0 -15.0
Departing Dow stocks
Chevron -2.2% 6.1%
Goodyear -8.7 -18.2
Sears, Roebuck -6.5 -36.5
Union Carbide -0.8 38.8
SOURCE: Bloomberg News
CAPTION: Michelle Mattox, operations manager at the Nasdaq-Amex market site in New York, scans quote screens yesterday.